The launch of Bitcoin was inevitable. Roger Ver even said that the Bitcoin ledger was the most important innovation after the internet.
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The traditional financial scene finds itself in stasis. Here’s how: It’s been over forty years since SWIFT revolutionized finance, enabling easy and âfasterâ cash flow across borders. The problem is that its rails are under the control of centralized banking megaliths that facilitate innovation to protect its territory. They watch every step. In addition, SWIFT as a solution is relatively expensive and settlement is not instantaneous.
The anonymous and mysterious creator of Bitcoin, Satoshi Nakamoto, wanted something different to escape the chaos of the Great Financial Crisis of 2008-09. The protocol was launched and has become a disruptive and widely adopted force.
Just recently, through its main regulator, the Securities Exchange Commission (SEC), the US government approved an exchange-traded fund to track Bitcoin futures contracts. This is a watershed moment for crypto that marks the era of institutionalization.
DeFi builds on what Bitcoin has built
While Bitcoin focuses on remittances and is purely a transactional layer, the advent of smart contracts on Ethereum has ushered in a new era expanding what digital gold offers. After several years of experimentation, DeFi dominates smart contracts as an emerging asset class that even US regulators see as a vital development. They recognize the decentralization of the underlying technology and the power of the community behind DeFi as an innovation that could even help stabilize the global financial industry.
At the time of writing this article, more than $ 219 billion in assets are locked into various DeFi protocols on platforms like Ethereum, Binance Smart Chain (BSC), Polygon, Tron, and more. Since Ethereum is the premier DeFi platform, it dominates the business, managing over $ 97 billion of various digital assets.
Incentive and income distribution is the new cool
What is interesting with DeFi is the incentive aspect. It builds on what makes its base layer – Ethereum – or any smart contract platform – robust and rewarding participants. For example, successful Ethereum miners receive 3 ETH every two blocks. In DeFi protocols, participants, who, for example, put their coins or provide liquidity to liquidity pools of decentralized exchanges, are rewarded with the platform’s native token.
Considering the solutions offered by the various DeFi protocols in finance, their tokens are valuable, often representing billions or hundreds of millions of market capitalization. The most valuable DeFi tokens – Uniswap (UNI), Terra (LUNA) and Avalanche (AVAX) – have a market cap of over $ 40 billion, according to trackers. The figure could be higher with increasing adoption and the entry of new users who fish to earn revenue from DeFi.
DeFi is community driven and generates income
There are no barriers to entry into DeFi since the space is open source and managed by the community. As a result, even new users with no previous blockchain experience can find hooks in the sphere and a chance to earn income. Additionally, there are various strategies you can use to earn income in DeFi. Sometimes these opportunities can be found in a single application. The Nimbus protocol, for example, is a duo-token platform functioning as a DAO in Ethereum and Binance Smart Chain (BSC). Community-driven, the platform enables users to earn sustainable income from multiple streams including loans, staking, through P2P services, and more. In total, the protocol provides 16 different revenue streams to users while functioning as a DAO registered in Malta. At present, more than 57,000 users are logged into the platform with at least 28,000 active wallets pinging to various countries around the world.
Kava protocol can also be an alternative for users. It is interoperable and has recently been activated Kava Lend – formerly the Hard Protocol – a trustless multi-chain money market operating on the scalable and cross-chain layer. In addition, users can also stake assets to earn income. Overall, this protocol can best be described as a cross-chain DeFi hub functioning as a trustless bank connecting users to digital asset products such as stablecoins, loans, and interest-bearing accounts.
On platforms like Yearn Finance, users have the opportunity to earn DeFi income through yield farming. The protocol works as a yield aggregator, allowing its users to earn YFI tokens when they lock digital assets on its executed contracts on Curve and Balancer using Yearn Finance. However, the protocol has several products like Earn, Zap, Vaults, and APY. Thanks to Earn, for example, the protocol can automatically choose which asset offers the highest loan rates for its users. On the other hand, the vault includes various investment strategies that allow users to get the best returns from other DeFi projects.
Top 3 Income Generating Strategies in DeFi
While there are many income-generating streams, as illustrated above, these are the three main methods of income generation in open finance:
To start here, DeFi users need to acquire ETH or some other high-level ERC-20 fungible token like, say, Chainlink (LINK) or a stablecoin. Once a user has passed that hoop, what they can do next is simple: lend. The process is trustless, paperless and fully controlled by an audited and secure smart contract.
The user lends their asset, which is then locked into the protocol for a set period of time in exchange for generally higher interest rates than traditional interest-bearing accounts offered by banks. Borrowers can then access this facility, receiving oversized loans, thus protecting the network against unforeseen shocks. In addition, it ensures that the collateral can sufficiently cover the loan taken out just in the event of default.
A user can also choose to stake their assets. However, it should be noted that staking only applies in Proof-of-Stake consensus platforms. These blockchains include Cardano, Algorand, Tezos, and many more. There are different ways to prick. A user can run a full node and lock in the minimum amount set by the network to qualify when validating transactions in exchange for bulk rewards.
At Tezos, for example, a user must wager at least 8,000 XTZ Coins to qualify as a validator (baker). Meanwhile, in Eth2 the minimum is 32 ETH. Since these requirements are high, staking can be done through an exchange like Coinbase or Binance or delegated by third-party vendors. Overall, stakers earn higher and therefore attractive passive income.
Decentralized exchanges like Uniswap or PancakeSwap depend on liquidity providers who provide assets to listed liquidity pools. In exchange for the liquidity provided, they receive a share of the exchange’s income, which comes from transaction fees, represented as liquidity provider tokens.
While attractive and apparently providing a passive income opportunity, a user may lose money due to fleeting losses caused by fluctuating asset prices, sometimes wiping out the gains from providing liquidity.
DeFi is a smart contract-driven drawer launched on trustless environments without KYC and AML requirements. This explains the billions of assets stuck in various protocols. Analysts argue that the sphere is still nascent. More innovations anchored in automation would continue to unlock more revenue-generating opportunities for users.
Nevertheless, while attractive, users should not participate blindly. There have been millions of losses due to all-in shootings and exploits. As such, users, whatever strategies they adopt, need to do due diligence, avoiding unaudited smart contracts to stay safe.